Question 4
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(a) What is a manufacturing account?
(b) Explain the following terms:
(i) prime cost;
(ii) factory overheads;
(iii) work-in-progress;
(iv) cost of goods transferred;
(v) finished goods;
(vi) profit on manufacturing.
Observation
Majority of the candidates that attempted this question could not explain the terms and the performance was poor. The expected answers include:
(a) - A Manufacturing Account – is an account prepared by organizations
engaged in the production of goods;
- It is prepared to ascertain the total cost of production.
(b) (i) Prime Cost -
- This is the cost that can be traced to a particular production unit;
- The components are direct materials cost, direct labour cost and direct expenses.
(ii) Factory Overheads
- These are indirect cost incurred in running the factory;
- They are cost which cannot be traced to a particular production unit.
(iii) Work-in-Progress
- These are partly finished goods or uncompleted works.
(iv) Cost of goods transferred
- This is the total production cost of finished goods;
- This is transferred from the Manufacturing Account to the Trading Account.
(v) Finished goods
- These are products that have passed through the manufacturing process;
- They are goods that are available for distribution to customers.
(vi) Profit on Manufacturing
- This is the excess of market value over the production cost of finished goods.